Editorial: Half an answer to sclerotic banks

Given that Britain is the only country in the G8 without one, Vince Cable's plans for a government-backed investment bank have much to recommend them. Complaints from smaller or more niche British companies struggling to raise money date back decades, and efforts to address them are long overdue.

Part of the trouble is structural: to establish the risk associated with making a loan, a bank must assess both the business and its market – an operation which swiftly becomes too costly when the amount of money requested is relatively small. The steady decline in competition in the banking sector has only exacerbated such difficulties. But now there is another – acute – squeeze, with banks forced to take fewer risks and hold on to more of their capital following the financial crisis.

To resolve the problem, the Government is to put up £1bn of public money, which could make for a total lending capacity of around £10bn. The bank will neither make loans directly nor undercut commercial rates, so as not to skew the market. But it will aim to reach those companies and sectors not well served by the current system.

So far, so good – particularly since early hints suggested the new "bank" might only be a repository of the series of rather limp growth-promoting schemes from the Government so far.

It would be as well not to expect too much, however. Even at £10bn, the new bank is not big enough to have much impact on the economy's current lacklustre state. Nor will it be up and running soon enough.

Equally, although a state-backed lender may do something for confidence, it cannot obviate the need to pay down debt, which is dragging on economic growth, or offset the danger of meltdown in the eurozone, the primary export market for so many British businesses.

Mr Cable's bank is a sound long-term development. But in the short term, demand from wary businesses will remain as much of a problem as supply from wary lenders has been.